Examiners Report January 2010

Transcription

1 Examiners Report January 2010 GCE Economics 6EC03 Edexcel Limited. Registered in England and Wales No Registered Office: One90 High Holborn, London WC1V 7BH

2 ii Edexcel is one of the leading examining and awarding bodies in the UK and throughout the world. We provide a wide range of qualifications including academic, vocational, occupational and specific programmes for employers. Through a network of UK and overseas offices, Edexcel s centres receive the support they need to help them deliver their education and training programmes to learners. For further information, please call our GCE line on , our GCSE team on , or visit our website at If you have any subject specific questions about the content of this Examiners Report that require the help of a subject specialist, you may find our Ask The Expert service helpful. Ask The Expert can be accessed online at the following link: Alternatively, you can speak directly to a subject specialist at Edexcel on our dedicated Business telephone line: ResultsPlus is our unique performance improvement service for you and your students. It helps you to: Raise attainment - by providing in-depth analysis of where your class did well and not so well, enabling you to identify areas to focus on/make improvements. Spot performance trends at a glance by accessing one-click reports. You can even choose to compare your cohort s performance against other schools throughout the UK. Personalise your students learning by reviewing how each student performed, by question and paper you can use the detailed analysis to shape future learning. Meet the needs of your students on results day by having immediate visibility of their exam performance at your fingertips to advise on results. To find out more about ResultsPlus and for a demonstration visit January 2010 Publications Code UA All the material in this publication is copyright Edexcel Ltd 2010

3 1 6EC03/01 January 2010 The performance was impressive across the range of ability for January EC03, the first paper of the A2 new specification 9EC01. There was evidence that students were well prepared, and, with the exception of Question 8, knew what to expect in terms of theory. There was a preference for Question 10 over 9 by a ratio of 4 to 1, with a higher level of understanding and performance on Question 10. The mean was 47.4 and standard deviation There were 3817 entries, compared to 6041 entries for Unit 6EC01. This suggests that many centres delayed entry until the Summer, owing to the synoptic nature of the specification, and also perhaps there was caution in entering as this was the first paper and there were few practice papers. The A grade was set at 53/72 with the E at 32. The areas that answers revealed the strongest understanding were economies of scale, price discrimination and oligopoly. There was evidence that most students had learnt a good deal about game theory. The most disappointing areas were in the wider understanding of regulation on the new specification, and monopolistic competition

4 2 General marking observations on Supported choice Questions It should be made very clear to students that marks for knocking out the incorrect keys must include reference to the specific letter, for example, It s not A because. A valid reason must be provided for a knockout mark, and there is only one mark even if more than one key is excluded for the same reason. There is a maximum of two marks for knocking out options on each supported choice question. This is because there are four incorrect options, and it has been determined that knocking out just a proportion of the incorrect answers is not tantamount to saying why the chosen key is correct. This explains the apparent discrepancy with unit 6EC01 where three marks can be earned for knocking out options, for there are only four keys on offer. For the explanation of the supported choice questions, it was possible to earn three marks even if the key is incorrect, but only in relatively rare circumstances. These are times where the reasoning was fully correct but the key itself was not given, or was given incorrectly. If the key was incorrect it was unusual to award three explanation marks, for there was not sufficient evidence that the question had been understood. As with Unit 6EC01, all the marks are available (1 + 3) if the correct answer is chosen but the letter does not actually appear in the box itself, although this is not advised as best practice to students. Comment on Individual Questions: Question 1 Mean 2.83 Most answers demonstrated a good understanding of concentrated industries and calculated concentration ratios accurately. Some did not discuss market share, but merely said there were many large firms. Some thought that having seven firms in an industry was enough to make it monopolistic. The most common distracter was B, with confusion over the characteristics of monopolistic competition. There was some good reference to the context, for example reference to the sunk cost of brand names. There was extensive use of knocking out on this question. Those who calculated the four-firm concentration ratio could gain a mark for that, and then earn a mark for using this as a reason that A is incorrect. Options D and E were knocked out frequently, with extensive understanding of the term natural monopoly despite the term itself not being explicit on the specification, but coming under the umbrella of monopoly. In knocking out E there was the opportunity to define and apply the term sunk costs.

5 3 1 Q01a 3 Q01b This scores 4 marks using the knock out.

6 4 1 Q01a 2 Q01b But the above only scores because there is only the CR calculation, and the definition of CR is not secure.

7 5 Question 2 Mean 2.84 Most identified the correct answer, and used the term economies of scale, although there were many who failed to mention that the phenomenon is only applicable in the long run. The most effective way to earn marks is to give types of economies of scale, and refer them to the context, in this case airlines. Application of the term was often in reference to short run characteristics, and this becomes a significant teaching point when it comes to 10b. Many were distracted by A, to avoid diseconomies of scale, which is explained by misreading the question or perhaps problems with the double negative in the key. Many chose D, largely explained by the confusion between contestability and concentration. The most successful knock out was C, with some observing that the Competition Commission is unlikely to rule on mergers that take place completely outside the UK, but most commonly it was argued that it was more likely to attract the attention of competition authorities than avoid it. 1 Q02a 3 Q02b 4 This scores full marks: although it is not applied to the airline context, there are enough valid points from the markscheme.

8 6 Question 3 Mean 2.65 In general the answers were well done, with good understanding of the relationship between TC and MC, and many offering a convincing definition of marginal cost. There were some failed attempts at definitions of marginal cost that did not include a sense of change or one more unit. The most common distracter by far was C, average costs are constant, and there is confusion by the fact that if TC is constant, TC/q is constant, which is clearly not the case if q is rising. One problem many found was that it was hard to know what to say to earn all three explanation marks. Some attempted to add fixed costs to the diagram, without success. A far more successful line of enquiry was to discuss the average variable costs (falling) or the constant variable costs. The most impressive answer was one where MC was drawn in, falling to the x-axis up to point A and rising again after point B. This is a question where using the context and knocking out incorrect answers are simple but effective tools. 0 Q03a 1 Q03b This just scores with the MC definition.

9 7 1 Q03a 3 Q03b This scores full marks, with definition, TC is constant, and a knockout.

10 8 Question 4 Mean (highest for SCQ) 3.48 There were very few errors in answers to this question, although diagrams were often disappointing. Clearly a diagram showing the industry as well as the firm in both the short and long run is an effective way to address this question. The problems that were found in attempting this was to draw the long run equilibrium for the firm making only normal profits, and also marginal cost rarely crossed AC at its lowest point. Answers understood the concept of perfect competition and applied it well to explaining the disappearance of SNPs in the long run. Answers that explained the dynamics of profits acting as signals, new entry undeterred by entry barriers, erosion of profits and the meaning of normal profit were often laid out effectively. It was a surprisingly large number of responses whish said that entry barriers were low rather than non-existent, and although this was credited it is not generally accepted as theory. 1 Q04a 3 Q04b Good answers do not have to be long!

11 9 Question 5 Mean 2.40 (second lowest SCQ) In a few cases, answers used an accurate diagram and some explanation to answer this question correctly, but the vast majority had a tick-shaped MC and many also showed AC as a curve. Some answers pivoted AR and MR which often made price rise (option D) and it is also possible to sketch the diagram correctly but with a small imprecision with showing the gradient of MR as twice that of AR, an incorrect conclusion could be drawn. In a sense this was therefore a weak question, as good technical drawing was required, but many intuitively realised that prices would be unlikely to rise in a period of falling demand, and used their understanding of the correct economic climate to see that firms do tend to cut prices, output and of course profits in an economic downturn. 0 Q05a 2 Q05b Full marks can be earned even if AC and MC are not horizontal

12 10 Question 6 Mean 2.58 The game theory question well done. Centres have obviously picked up on the inclusion of Game Theory in preparation for this examination, and in particular the Sample Assessment Materials provided a helpful steer. Very few answers got as far as explaining why the most likely outcome was D, however, even though revenue was lower, and there was confusion between revenue and profits. The best answers referred to collusion, trust issues, interdependency, Nash equilibrium and dominant strategies. 1 Q06a 3 Q06b This earns the marks many times over. 4

13 11 Question 7 Mean 2.59 Drawing of the long run equilibrium point for monopolistic competition revealed two common weaknesses: an inability to identify a tangency between AR and AC, and difficulty in lining up this point with MC=MR. Some had rote learned it, but there was still some difficulty in applying this to the efficiency points in the question. This became an almost impossible task for those who did not show MC crossing AC at its lowest point. The key related to inefficiencies, so merely defining the efficiencies was not a full answer to the question. It is important that the answers relate the model to the misallocation of resources. There was a mark for giving at least one characteristic of monopolistic competition, which was in fact quite hard to earn for those many answers which took the model as being wither monopoly or competition. It is important to learn the distinguishing marks, such as differentiated products, and not similarities, such as MC=MR, branded products or relatively inelastic demand, which could apply to several models. A very effective knock out was D, for many could argue that supernormal profits would be eroded. 1 Q07a 3 Q07b

14 12 This has an excellent diagram (2 marks) and earns definition and knockout marks.

15 13 Question 8 Mean 1.58 (lowest for SCQs) This was the most problematic question, in that it applies to the new broader remit of regulation which the specification now covers, and rate of return is not a term that the students were expected to know specifically. The answer could be deduced from the stem, but the weaker responses usually opted for B Quality may decline. which seemed logical if they did not actually think through the logic of the question. Many confused a profit cap with a price cap. Many chose A, although this is a reverse of the answer, assuming that the profit cap was in absolute terms rather than relative to capital assets as a percentage. The most effective knockout was C, with many correctly deducing that a limit on profits would prevent unlimited profits! 0 Q08a 2 Q08b This has a sense of regulation and a knockout, so 2/4 marks.

16 14 General marking observations on the data questions In general, answers found Q9 difficult. There was a lot of confusion about what BAA is, the relationship between Ferrovial and BAA (Spanish ownership of a British-sounding company), who are the customers airlines or airline passengers, and the difference between the Competition Commission and the OFT. It required close reading of the data and some general knowledge, as well as some sound economic theory, to score well. Answers were often stunted (especially 9b and 9c) and it was common to find there was no evaluation. Question 10, by contrast, proved to be highly accessible. The issues surrounding horizontal integration proved easy to analyse and evaluate (Question 10b) with implications for Merck itself (10c) and its customers and employees (10d). Answers tended to be full and clearly evaluative. A number of answers failed to glean from what was clear in the extracts that Merck is a US company and the FTC of the USA is the relevant regulatory body and, so, sometimes answered inappropriately. Whilst it is not expected that students have specific knowledge about competition cases and policies in every country, they must be willing to use the information provided and apply what they do know about regulation and competition authorities to cases outside the UK and EU. Comments on individual questions Question 9(a) Mean 3.13 out of mark base of 4 A number of answers were understandably torn in this question, between whether the correct answer was monopoly or oligopoly, and a few felt compelled to examine the case for each an intelligent response (and usually very well executed) but which was more work than it was worth for the marks on offer. The opportunity cost of the four-mark questions must be remembered, and please note that there is never evaluation in the 4-mark questions. Many failed to consider the context of the questions, that is, the airport industry in London. Instead, they answered more generally on the airport or even airline market. A number of answers who tried to use Figure 1 weakened their responses by failing to realise that the three biggest of the five London airports were owned by one firm. Those who opted for monopoly generally got two application marks as well as the two for theory, but those that chose oligopoly struggled to back their choice with reference to the data, instead just giving a run-down of the characteristics of oligopoly. Given that the extract explicitly stated that there was one large dominant player in the market, no marks were given for oligopoly unless sufficient justification was provided.

17 15 4 Q09a A good answer, with plenty of theory 4/4 marks

18 16 Question 9(b) Mean 6.92 out of mark base of 14 There was a widespread tendency to write vaguely about consumers when the customers paying landing fees are in fact other firms. In some cases there was mere replication of theory without applying it carefully to the context. Some credit was allowed for the impact on consumers as passengers, although to consider them alone restricted the marks. Better answers distinguished between the airlines as customers of the airports and passengers of the airlines, to whom the airlines might well pass on the higher cost of landing fees in their fares. Many answers found it difficult to come to terms with the concept of increased competition. Some thought that fewer, larger firms meant that competition had increased, perhaps because market forces were intensified. Few marks could be awarded for this approach. There were very few answers not attempting any evaluation at all, but there was an apparent need to outline what is expected for a 14-mark question such as this. For the 7 KAA marks, a simple identification or definition is expected, and three points for two marks each, or two points well developed and applied, up to three marks. A combination such as marks is acceptable. For the evaluation up to four points, 2e + 2e + 2e + 1e, was allowed, but fewer points well developed could be awarded 4e + 3e. 5 Q09b

19 17 Mostly not relevant, but there is reference to airports customers at the end and an evaluative attempt. 5/14

20 18 Question 9(c) Mean 4.13 out of mark base of 8 Many set out to answer a different question from the one that was set. Whereas Question 9b had asked about the case for competition, 9c asked how effective competition policy is. There were some good answers which referred to the 2002 Enterprise Act, but many confused the role of the Competition Commission with specific industry regulators and many diverted their arguments to discuss price caps. Weaker answers were vague or confused about applying the role of the Competition Commission in industries such as the airport industry, and in particular using the information provided that the Commission was forcing BAA to dispose of Gatwick. It must be stressed that the generous time allowance for this paper is intended to allow students to read the material and reflect on it; a number of answers drew resourcefully on Extract 2 although weaker answers re-stated points (especially However the future of Britain s airports will be determined by regulation and planning rather than by competition ), without explanation or active application. This question provided the opportunity to use knowledge of the Competition Commission, although using the data provided was sufficient; only a small minority had anything further to add, and those who did were generously awarded. Despite an 8- mark base, there were four marks for evaluation. An important teaching point to note is that all questions apart from the 4-mark questions are 50% evaluation. Problems such as regulatory capture were rarely discussed, but some did raise other issues which make regulation difficult. 4 Q09c

21 19 This is a case where price capping is used, in error. The evaluation is credited. Score 1 + 4e = 5/8

22 20 Question 9(c) Mean 6.81 out of mark base of 14 There were some very full and well-argued answers. A number were able to use the sub-market diagrams and elasticity/profit analysis of price discrimination theory to good effect although too many were unable to reproduce the diagrams convincingly and/or to apply them to Heathrow and other BAA airports. A number of answers suffered from a lack of time to do justice to this 14-mark question, often because too long had been spend on parts 9a and 9b. However, None of these seemed to realise that, although the sub-diagram analysis could still hold good, this is not really a case of price discrimination as such (landing at Heathrow not being at all the same good or service as landing at Luton). Perhaps, those who did realise chose to answer the question differently; often, good marks were earned by other means. The question was a good discriminator in that only the good answers appreciated the need to look at reasons and consequences, despite it being flagged by the bold type. Many found it hard to evaluate fully, and the 14 mark questions were particularly lacking in extended evaluative arguments. 7 Q09d

23 21 A brief look at causes and consequences, and just one attempt at evaluation e = 7/14

24 22 Question 10(a) Mean 3.03 out of mark base of 4 Although arguments from Figure 1 were often made very well, it was disappointing that so many answers mistook market capitalisation for market share. Not just because of this, a number of answers showed only a flawed grasp of the concept of concentration ratios, which they correctly perceived as relevant. 3 Q10a Here the theory is sound but the application weak ap = 3/4

25 23 Question 10(b) Mean 8.63 out of mark base of 12 Mostly, answers had little problem with this question although some incurred the opportunity costs of digressing into the consideration of stakeholders in general whereas the wording of the question limits relevant responses to the shareholders (and arguably the employees) of Merck. Economies and diseconomies of scale, market share and market power, and the particular attractions of Schering-Plough were deployed effectively by many candidates. Weaker answers failed to realise that more sales or more profit would not in themselves count as an advantage unless they were to be more in relation to the new combined market capitalisation or some such a relationship for which there is no evidence in the extracts. Better answers developed more sales and more profit into well-argued points about economies of scale and market power, or used application in the context of the pharmaceutical industry, for example with reference to R&D and drug development. There was a worrying misunderstanding of economies of scale as a simple fall in average cost as output increases, without any concept of the long run. Managerial economies are not equivalent to rationalisation, and synergies are not simply cost cutting because of overlap of job description. Relatively few answers gave explicit recognition to fact that the process of merger itself is not cost-free and that net benefits need to be judged against these cost, the possible divorce of ownership and control, and the danger that, depending on the terms, the takeover might, at least in the short term, benefit the shareholders of Schering-Plough at the expense of those in Merck. Good understanding was shown, and even weaker answers were able to present a logical list of benefits for Merck. Where marks were not gained it was generally through weak or missing evaluation, or misreading the data. It was unfortunate that a few answers misread the labelling of Schering-Plough in Figure 1 as part of the bar itself and thought the merger would give the new firm the highest capitalisation in the market and so answered inappropriately as a result. 11Q10b

26 24 This earns 12/12 before the end of the answer is reached!

27 25 Question 10(c) Mean 8.20 out of mark base of 12 This was a question that the students seemed to welcome more than any other. An enormous variety of pricing policies was suggested, although given the wide choice it was surprising that so many used policies that they did not really understand. The most common confusion was between limit pricing and predatory pricing. While these are excellent choices, in that there is much scope for evaluation, it must be clear that limit pricing allows SNP and the incumbent has lower average costs than potential entrants, while for predatory pricing there must be the short term cutting of prices to below AC and long term raising of prices. The weaker answers did not give a policy but merely an action, such as cutting price, with limited economic analysis. The stronger answers discussed interdependence with other firms, such as price wars and the illegality of predatory pricing as opposed to other pricing strategies. Advertising was the most popular non-pricing strategy. Only the better answers seemed to recognise the differences between over-the-counter sales, prescription sales, and sales for use by corporate bodies and government agencies, and the consequences these might have for pricing strategies and marketing. KAA marks were unlikely to rise above 4/6 when merely offering abstract theory unrelated to the pharmaceutical industry. The evaluation was usually that advertising is a sunk cost. Answers should be applied as much as possible to context, and development should have been extended beyond the very formulaic advertising answers, using as much economic analysis as possible. One major issue that could be picked up from the text is that medicines are largely sold to the NHS and private doctors, and a national TV campaign would not be appropriate in this context. 9 Q10c

28 26 Economics 6EC03

29 27 This earns full marks for sales max, but there is no eval of the advertising campaign, nor indeed a correct context. 8/12

30 28 Question 10(d) Mean 7.62 out of mark base of 12 Most wrote first about the dangers to each interest group and then evaluated these points with consideration of possible benefits. This approach required some flexibility in the application of a markscheme based on the wording of the question that had anticipated the reverse approach, be in the interests of consumers and employees, but with 50% of the marks available for evaluation, it did not affect the score whether the answer was for or against. Many could identify factors that were in the interests as well as against the interests of consumers. The most common advantage was that costs savings might be passed on and those consumers would have more choice. The disadvantages were that the mergers would mean some lines of research were likely to stop and some products withdrawn, which is likely to limit their choice, but struggled with employees especially in seeing any possible benefits to at least some employees. AS with Question 10b, recognition that the customers are likely to be health service providers and not individual was rarely seen. Also there was difficulty in applying the issues to further mergers in the pharmaceutical industry. The question proved to be a good discriminator. 12Q10d

31 29 38 A balanced answer. This is as much as we would expect at the top of A2 level. 12/12 marks

32 30 Statistics 6EC03 Grade A B C D E Mark

33 31

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